How to choose the best mutual fund scheme?
Mutual funds are ideal investment options for both risk-aggressive and risk-averse investors as they help to achieve investment goals easily and effectively. Choosing the best mutual fund scheme irrespective of the various alternatives is a challenge in itself.
Both beginners and seasoned investors must take precautions while investing because of the immense risk involved.
You do not want to throw away your hard-earned money on just a hearsay scheme or a fund that offers average returns, especially when you have a scope of earning higher returns at less risk.
10 steps to Choose the Best Mutual Fund Scheme
Step 1: Identify Investment Goals
Identify your investment goals by answering related questions like is the objective current income or long-term capital gain? Is the money for short-term like education expenses of children or future expenses like the retirement fund that is very far away?
Identifying the investment goals helps to choose the mutual fund scheme that will fulfill the financial aspiration of the investor effectively.
Step 2: Determine Risk Tolerance
How much return are you expecting on your investment matters as it helps to determine whether the investor is a moderate or high-risk taker? Risk tolerance refers to the risk that the investor is willing to take with his investments.
It is now compulsory for all mutual fund houses to show the risk associated with the invested amount.
Step 3: Look at the Time Horizon
The time horizon is the period for which the investor desires to invest his money in a mutual fund scheme. It can be short or long term ranging from one day to even more than five years.
There are different fund categories meant for different time horizons and it is better to choose the best mutual fund scheme that will be able to meet your specific time horizons.
Step 4: Focus on the Fund Type – Growth or Dividend
Choose the fund type which is the best option to meet your specific needs. The growth option is best for long-term needs as it can handle higher volatility and risk factors. These funds also have greater potential for higher returns.
Dividend funds are short-term investment goals. They provide interest regularly and are considered stable investments with moderate returns.
Step 5: Look at the Fees and Loads
Some mutual funds charge a sales fee at either the time of purchase or sale of the investment known as a load. The purpose of the load is to cover the associated administrative charges and discourage turnover.
Mutual fund houses levy various charges which are paid by the investors, who must know about them in detail before choosing the mutual fund scheme for themselves.
Step 6: Consider the Assets Under Active or Passive Management
Determine the type of assets you want in your portfolio and then choose the mutual fund scheme accordingly.
Actively managed funds levy higher fees and try to outperform the benchmark index whereas passively managed funds levy lower fees and try to track the performance of a benchmark index.
Step 7: Evaluate Managers and Past Results
Conduct research about the fund’s history by asking yourself whether the fund has suffered more volatility than other major funds and whether the fund manager was able to deliver the expected results.
Reviewing the fund’s prospectus gives a fair idea of its future and helps to choose the best fund.
Step 8: Size of the Fund
Although the size of the fund does not stop it from meeting the investment goals investors should keep it manageable for better handling.
Step 9: Do not be Dependent Only on the History
Although the fund history is an indicator of future performance it cannot guarantee high returns. Take related things into consideration like comparison with the benchmark index, fund types, fees, risk factors, etc. before making a viable choice about the mutual fund scheme you want to invest in.
Step 10: Select What Matters
Investors must focus on things that matter for instance expense ratios, investment strategy, risk factors fees, and a chance of future success.
It is important to take the help of reputed platforms and understand the best ways of choosing the right mutual fund scheme for yourself.
The EduFund App along with the SIP calculator makes the process of choosing the mutual fund scheme an easy experience.
Customer-friendly saving/ investment experts provide customized solutions, top-class security enables secured transactions, and a scientific fund tracker screens various financial scenarios to recommend the best out of the 4000+ mutual funds associated with the platform.
Every investor wants to choose the best mutual fund scheme but they must consider their individual preferences, investment objective, risk appetite, and the fundamental features of the scheme before making a final decision.
What are the key factors to consider when choosing a mutual fund scheme?
Key factors include investment goals, risk tolerance, time horizon, fund type (growth or dividend), fees, assets management style, fund manager’s track record, fund size, and various other critical parameters.
How can one determine their risk tolerance?
Risk tolerance is determined by the investor’s willingness to accept risk for potentially higher returns. It can be assessed by evaluating how much volatility or fluctuation in investment value one is comfortable with.
What is the significance of the time horizon in selecting a mutual fund scheme?
The time horizon indicates how long you plan to keep your money invested. It’s crucial because different fund categories are suitable for different time frames, and choosing the right one aligns with your financial goals.
What are the fees and loads associated with mutual funds?
Mutual funds may charge sales fees, known as loads, at the time of purchase or sale. Investors should also be aware of other fees like expense ratios, which cover administrative costs, and impact overall returns.
Why is it important to consider a fund manager’s past results?
Evaluating a fund manager’s track record provides insight into their ability to deliver expected results and manage the fund effectively. Past performance is one of the factors investors consider when making investment decisions.